Sime Darby Plantation Sdn Bhd

Transcription

1 CREDIT OPINION Sime Darby Plantation Sdn Bhd New Issuer Report New Issue Summary Rating Rationale Sime Darby Plantation Sdn Bhd s (SDP) 1 issuer rating reflects its position as an integrated palm oil producer, with the ability to benefit from the favorable long-term demand fundamentals of the industry. RATINGS Sime Darby Plantation Sdn Bhd Domicile Malaysia Long Term Rating 1 Type LT Issuer Rating - Fgn Curr Outlook Stable More importantly, the rating reflects its leadership position as one of the largest listed oil palm plantation company globally by planted area and crude palm oil production, and the fact that the company is the leading producer globally of certified sustainable palm oil. SDP s rating also takes into account its importance to the Malaysian economy and implicit support from its government-linked shareholders: Permodalan Nasional Berhad (PNB, unrated) and Malaysia s Employees Provident Fund (unrated). Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. On the other hand, the rating is constrained by SDP s exposure to volatile crude palm oil (CPO) prices, a modest financial profile and weak liquidity position. Nonetheless, we expect refinancing risk to be partially mitigated by SDP s superior access to trade financing and funds from local and international banks. Contacts Rating Outlook Jacintha Poh VP-Senior Analyst jacintha.poh@moodys.com The rating outlook is stable, reflecting our expectation that SDP s management will maintain a prudent and conservative approach towards further investments, as the company pursues growth. Diana Beketova Associate Analyst diana.beketova@moodys.com Factors that Could Lead to an Upgrade Laura Acres MD-Corporate Finance laura.acres@moodys.com A rating upgrade is unlikely over the near to medium term, but positive momentum could build, if SDP successfully executes its business plans and grows its scale, generates strong positive operating cash flows, and demonstrates sustained improvement in its financial profile, such that cash flows from operations/net debt is above 35%-40%, adjusted debt/ DA is below 2.0x, and A/interest expense is above 6.0x. Factors that Could Lead to a Downgrade SDP s rating could face downward pressure if: (1) the company fails to implement its business plan, such that its financial profile differs from our expectations; and/or (2) there is a deterioration in palm oil prices, leading to a protracted weakness of SDP s operations and credit profile. We consider an adjusted debt/da above 3.5x and an adjusted A/ interest expense of less than 3.0x on a sustained basis, as indications that a rating downgrade could be necessary.

2 Key Indicators Exhibit 1 06/30/ /30/2015 Total Sales (USD Billion) $2.9 $3.0 CFO / Net Debt 11% 10% Debt / DA 6.2x 6.8x A / Interest Expense 2.1x 3.9x Debt / Book Capitalization 54% 54% Note: All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. Source: Moody's Financial Metrics Credit Strengths Market leadership position within the upstream palm oil segment Integrated palm oil player, with operations along the entire palm oil value chain Well-positioned to benefit from the favorable long-term outlook for palm oil demand Implicit support from government-linked shareholders Proven track record of access to funding mitigates refinancing risk Credit Challenges Inherent exposure to CPO price risk Elevated leverage profile likely to improve over the next months Weak liquidity position Corporate Profile Sime Darby Plantation Sdn Bhd (SDP) is an integrated plantation company with a business that spans the entire palm oil value chain. SDP is currently a wholly-owned subsidiary of Sime Darby Berhad (1 review for downgrade). The parent company plans to list SDP as a standalone company on Bursa Malaysia by end-2017, through a dividend in specie distribution. Consequently, the shareholders of SDP will be the same as that of Sime Darby Berhad (Exhibit 2). This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Exhibit 2 SDP s Shareholding Structure Post Spin-Off by Sime Darby Berhad Current Shareholding Structure Permodalan Nasional Berhad 6% Skim Amanah Saham Bumiputera 43% PNB-Managed Funds 7% Employees Provident Fund 11% Other Shareholders 33% Sime Darby Berhad Sime Darby Plantation Sime Darby Motors Sime Darby Industrial Sime Darby Property Others PNB-Managed Funds Employees Provident Fund Other Shareholders Shareholding Structure Post Dividend In Specie Distribution Permodalan Nasional Berhad 6% Skim Amanah Saham Bumiputera 43% Sime Darby Plantation 7% 11% Sime Darby Berhad Sime Darby Motors Sime Darby Industrial 33% Sime Darby Property Others Note: Shareholding data are as of 31 March 2017 Source: Sime Darby Berhad Detailed Rating Considerations Market leadership position within the upstream palm oil segment SDP is one of the largest listed oil palm plantation company globally by planted area and CPO production. It is also the leading producer globally of certified sustainable palm oil, according to the Roundtable of Sustainable Palm Oil. The company s upstream business is well-placed to partially mitigate some of the industry s key risks, including: (1) weather challenges; (2) changes in export/import duties by producing/consuming countries; and/or (3) compliance with sustainability practices, given that investors are paying increasing attention to environmental, social and governance (ESG) issues, and have urged palm oil producers to adopt and strictly implement sustainable practices that allow for strong monitoring and mitigation of negative ESG impacts. At 30 June 2016, SDP s land bank totaled around one million hectares (ha), of which, 603,254 ha were oil palm planted areas across five countries: Malaysia, Indonesia, Papua New Guinea, Liberia and Solomon Islands. The geographically diversified land bank can partially mitigate regulatory risk associated with changes on duties, as well as provide a natural hedge against weather challenges, and enable SDP to enjoy an alternative calendar crop cycle in Papua New Guinea and the Solomon Islands. 3

4 For its fiscal year ended 30 June 2016 (FY2016), SDP produced around 2.4 million metric tons (MT) of CPO, which represented approximately 4% of global production. The size and scale of SDP s upstream palm oil business allows it to achieve significant economies of scale and revenue efficiencies, which in turn lower its overall production costs. Of SDP s 2.4 million MT of CPO production, around 2.2 million MT represented certified sustainable palm oil, which was equivalent to approximately 21% of global production. SDP s strong commitment to sustainability should help mitigate the negative ESG impacts and position it well for growth, because certified sustainable palm oil and its derivatives are increasingly required by leading global food and household product companies, although currently, there is no material premium for the certified product. Inherent exposure to CPO price risk but long-term outlook for palm oil demand is favorable Over the past decades, the global consumption of palm oil has grown, and we expect long-term demand for palm oil to remain favorable, supported by: (1) greater consumption in developing countries such as Indonesia, India and China as their GDPs grow; (2) health-conscious consumers in developed countries with a preference for vegetable oils; (3) the low production cost of CPO, compared to other edible oil sources; and (4) increased demand for biodiesel in Western nations and palm oil producing countries. Although SDP is well-positioned to benefit from the favorable long-term demand for palm oil, it is exposed to the volatility of CPO prices, driven by the supply of CPO, as well as prices for other edible oils such as soybean, rapeseed/canola and corn with such sources able to substitute CPO in many applications. The supply of CPO is determined by fresh fruit bunch (FFB) yields and oil extraction rates that can be affected by extreme weather conditions, the application of fertilizers, and the age profile of oil palm trees. In general, output of CPO is seasonal, with the JulySeptember quarter typically proving the strongest across Malaysia and Indonesia, and the January-March quarter the weakest in terms of FFB harvesting for oil palm plantations. Integrated palm oil player, with operations along the entire palm oil value chain SDP is an established integrated palm oil producer, with operations along the entire value chain, including the production and sale of upstream byproduct such as crude palm oil and palm kernel oil as well as downstream products, such as food and non-food based oils and fats, oleochemicals, biodiesel and renewables. In FY2016, SDP harvested around 9.6 million MT of FFB (FY2015: 9.4 million MT) and achieved an FFB yield of around 19 MT per mature hectare (FY2015: 20 MT per mature hectare). While the company saw a decline in FFB yield in FY2016 compared with FY2015 caused by severe weather conditions associated with El Nino its FFB production remained broadly stable, due to the full year contribution from New Britain Palm Oil Limited (unrated), which owns plantations in Papua New Guinea, and which was acquired by SDP in March Over the next months, we expect that SDP will achieve better FFB yields, as weather conditions normalize, and the company begins to reap benefits from its innovation initiatives that are aimed at improving harvesting yield and productivity. At 30 June 2016, SDP had downstream operations in 16 countries where it owns and manages 12 refineries, with a capacity of approximately four million MT per annum. It has a production capacity of approximately 700,000 MT of oleochemicals and 300,000 MT of biodiesel per annum. In FY2016, approximately 80% of SDP s upstream products were used in its downstream operations. While downstream operations continue to grow and contributed to three-quarters of revenue in FY2016, SDP s upstream operations which generate higher margins contributed more than three-quarters of total. We expect to see a similar trend over the next months, with margins from SDP s upstream operations registering around 40% and downstream operations around 3% (Exhibit 3). 4

5 Exhibit 3 SDP s Business Model Is Fully Integrated Downstream (left axis) Upstream Margin (right axis) Downstream Margin (right axis) 45% 40% 40% 39% 37% 80% 32% 30% 29% 60% 35% 25% 20% 40% 15% PBIT Margin Breakdown between and PBIT Upstream (left axis) 10% 20% 3% FY2014 FY2015 0% FY2016 5% 3% 3% 3% 1% 0% FY2017 (F) FY2018 (F) Sources: Moody s Financial Metrics, Moody s Investors Service estimates Implicit support from government-linked shareholders With a global workforce of around 102,000 employees, the majority of which are in Malaysia, SDP is an important company in the context of the Malaysian economy. It supports local communities by providing employment, technical training, smallholder schemes and community development projects, with a focus on education and enhancing quality of life through a safe work environment. SDP is currently a wholly-owned subsidiary of Sime Darby Berhad. The parent company plans to list SDP as a standalone company on Bursa Malaysia, through a dividend in specie distribution. Consequently, if the listing goes ahead, the shareholders of SDP will be the same as that of Sime Darby Berhad. PNB an asset manager and a wholly-owned subsidiary of Yayasan Pelaburan Bumiputera (unrated) is a Malaysian governmentlinked investment company. At 31 March 2017, it held 56% of Sime Darby Berhad, through: (1) a direct shareholding of 6%; (2) its unit trust scheme, Skim Amanah Saham Bumiputera's held a 43% stake; and (3) its other managed funds' holdings of 7%. As of the same date, Malaysia s Employee Provident Fund held an 11%-stake in Sime Darby Berhad. We do not regard PNB's presence as a shareholder in the same way that we view the involvement of Khazanah Nasional Berhad in Malaysian companies. Ownership by Khazanah is seen by us as direct ownership by the state, and, in such circumstances, we apply our joint default analysis approach for government-related issuers. By contrast, PNB's responsibility is more to its individual unit trust holders to whom it pays income, while Malaysia s Employee Provident Fund is the country's compulsory pension savings scheme. We therefore expect PNB to seek a healthy dividend flow but to also prove an accommodative shareholder. Elevated leverage profile likely to improve over the next months SDP s leverage profile was elevated in FY2015 and FY2016, as a result of its heavily debt-funded acquisition of New Britain Palm Oil Ltd (unrated) in March We expect that SDP s leverage will improve substantially in FY2017, on debt reduction and earnings improvement. Before SDP s listing, Sime Darby Berhad will clear the intercompany loans owing from SDP. The parent is reallocating a portion of its external borrowings to SDP the USD800 million sukuk bonds issued by Sime Darby Global Berhad, and MYR2.2 billion of sukuk perpetual -- and offsetting the rest through a transfer of assets, such that SDP will likely register a total adjusted debt of around MYR9.5-MYR10.2 billion in FY2017 and FY2018, lowered from around MYR14.2 billion in FY2016. Over the next months, we expect that SDP s adjusted debt/da will improve to around 3.0x from 6.2x in FY2016 and its adjusted A/interest expense should improve to around 3.5x from 2.1x, owing to an improvement in earnings, led by higher CPO prices (Exhibit 4). 5

6 Exhibit 4 SDP s Key Financial Metrics Will Improve MYR Million Adjusted Debt (left axis) Adjusted Debt/DA (right axis) A/Interest (right axis) 16, x 14, x 12, x 10, x 8, x 6, x 4, x 2, x FY2014 FY2015 FY2016 FY2017 (F) FY2018 (F) Sources: Moody s Financial Metrics, Moody s Investors Service estimates Liquidity Analysis At 30 June 2016, SDP had cash balances of MYR636 million, against total short-term external debt of MYR775 million. In FY2017, we expect the company to generate cash from operations of around MYR2 billion, the bulk of which will be used to fund capex that we estimate will total around MYR1.6 billion, in addition to a dividend payout of about MYR600 million. While SDP s cash and cash inflow amounts are insufficient to cover its short-term obligations, it had about MYR1.7 billion of committed undrawn credit facilities, providing a buffer against its weak liquidity position. On 18 April 2017, Sime Darby Berhad announced a tender offer and consent solicitation on its USD800 million sukuk bondholders to move them to SDP. If all bondholders consent to the move with no tenders SDP will face refinancing risk, because USD400 million of the sukuk will mature in January 2018, while the other USD400 million matures only in January We view that such a risk will be mitigated by SDP s strong and proven track record of access to funding provided by local and international banks. 6

7 Rating Methodology and Scorecard Factors When mapped to Moody's Global Rating Methodology for Protein and Agriculture Industry, the grid indicated rating for SDP is 2, based on its financials for the full year ended 30 June 2016 (Exhibit 5). The actual 1 rating reflects: (1) SDP s market leadership position within the palm oil industry; (2) implicit support from its government-linked shareholders; and (3) our expectation that SDP s leverage and coverage metrics will improve, largely driven by debt reduction. Specifically, the intercompany loans from Sime Darby Berhad will be offset by the transfer of assets. Exhibit 5 Current 06/30/2016 Protein and Agriculture Industry Grid [1] Factor 1 : SCALE & DIVERSIFICATION (20%) Measure Moody's Month Forward View As of 06/30/2016 [2] Score Measure Score a) Total Sales (USD Billion) $2.9 $3.0 - $3.5 b) Geographic Diversification c) Segment Diversification Factor 2 : BUSINESS POSITION (25%) a) Market Share A A A A b) Product Portfolio Profile c) Earnings Stability Factor 3 : FINANCIAL POLICY (15%) a) Financial Policy Factor 4 : LEVERAGE & COVERAGE (40%) a) CFO / Net Debt 11% B 20% - 23% b) Debt / DA 6.2x Caa 2.9x - 3.2x - c) A / Interest Expense 2.1x B 3.4x - 3.7x d) Debt / Book Capitalization 54% 35% - 38% Rating: a) Indicated Rating from Grid 2 b) Actual Rating Assigned 3 1 [1]All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures. Source: Moody's Financial Metrics Ratings Exhibit 7 Category SIME DARBY PLANTATION SDN BHD Outlook Issuer Rating Moody's Rating Stable 1 Source: Moody's Investors Service 7

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